Dr. Edward
W. Younkins is a Professor of Accountancy and Business
Administration at Wheeling Jesuit University in West Virginia. He
is the author of Capitalism and Commerce.

MISES, FRIEDMANAND RAND:
A METHODOLOGICAL COMPARISON

by Edward W. Younkins

Three of the most
respected and influential free-market thinkers of the 20th century
are Ludwig von Mises (1881-1973), Milton Friedman (1912- ), and Ayn
Rand (1905-1982). The purpose of this essay is to compare and
evaluate the respective methodological approaches of each of these
theorists who have influenced the course of history with their
ideas. We will see how and why Rand's realist approach is superior
to both Mises' rationalism and Friedman's empiricism.

Mises' Praxeology

Mises argued that concepts can
never be found in reality, wanted to construct a purely deductive
system, and was searching for a foundation upon which to build it. He
was seeking a theoretical foundation that could not be questioned or
doubted. He wanted to find knowledge of logical necessity and desired to
escape the concrete-based empiricism of historicism. His mission became
to look inward in order to deduce a system that was logically
unobjectionable. Mises aspired to find laws that could only be verified
or refuted by means of discursive reasoning.

Mises' action axiom, the universal introspectively-known fact that men
act, was the foundation upon which Mises built his deductive system.
Action, for Mises, is the real thing. Mises said that action was a
category of the mind, in a Kantian sense, that was required in order to
experience phenomenal reality (i.e., reality as it appears to us). The
unity found in Mises' theorems of economics is rooted in the concept of
human action. Mises' economic science is deductive and based on laws of
human action that he contends are as real as the laws of nature. His
praxeological laws have no spatial, temporal, or cultural constraints.
They are universal and pertain to people everywhere, at every time, and
in all cultures.

Human actions are engaged in to achieve goals that are part of the
external world. However, a person's understanding of the logical
consequences of human action does not stem from the specific details of
these goals or the means employed. Comprehension of these laws does not
depend on a person's specific knowledge of those features of the
external world that are relevant to the person's goals or to the methods
used in his pursuit of these goals. Praxeology's cognition is totally
general and formal without reference to the material content and
particular features of an actual case. Praxeological theorems are prior
to empirical testing because they are logically deduced from the central
axiom of action. By understanding the logic of the reasoning process, a
person can comprehend the essentials of human actions. Mises states that
the entirety of praxeology can be built on the basis of premises
involving one single non-logical concept – the concept of human action.
From this concept all of praxeology's propositions can be derived.

Mises contends that the axiom of action is known by introspection to be
true. In the tradition of Kant, Mises argues that the category of action
is part of the structure of the human mind. It follows that the laws of
action can be studied introspectively because of aprioristic
intersubjectivity of human beings. Not derived from experience, the
propositions of praxeology are not subject to falsification or
verification on the basis of experience. Rather, these propositions are
temporally and logically prior to any understanding of historical facts.

For Mises, economic behavior is simply a special case of human action.
He contends that it is through the analysis of the idea of action that
the principles of economics can be deduced. Economic theorems are seen
as connected to the foundation of real human purposes. Economics is
based on true and evident axioms, arrived at by introspection, into the
essence of human action. From these axioms, Mises derives logical
implications or the truths of economics. Mises' methodology thus does
not require controlled experiments because he treats economics as a
science of human action. By their nature, economic acts are social acts.
Economics is a formal science whose theorems and propositions do not
derive their validity from empirical observations. Economics is the
branch of praxeology that studies market exchange and alternative
systems of market exchange.

Friedman's Predictive Approach

Milton Friedman dismisses
Mises' apriorism and aprioristic reasoning as a subjective method of
considering the introspections of a person's own mind. Seeking
objectivity and verifiability, Friedman prefers the empirical method
which uses publicly and socially available data. As an empiricist, he
considers a theory to be useful if the theory permits individuals to
predict occurrences of the phenomenon. This is in opposition to Mises
and many other Austrian thinkers who regard the explanation of economic
phenomena as making the world understandable in terms of human action in
the pursuit of values and goals.

In his 1953 article, "The Methodology of Positive Economics," Friedman
maintained that the realism or unrealism of the assumptions of economic
theory is no guide to its usefulness. He rejected both introspection and
the plausibility or realism of assumptions as a way of evaluating a
theory. He asserted that these had no bearing on the predictive power of
a theory or hypothesis with respect to its further applications. What
matters to Friedman is whether or not the predictions of a theory
correspond to empirical evidence. For Friedman, an instrumentalist,
hypotheses are tentatively chosen because they have been successful in
yielding true predictions.

"Mises' action axiom, the universal
introspectively-known fact that men act, was the foundation upon which
Mises built his deductive system. Action, for Mises, is the real
thing."

Friedman contends that an hypothesis can be tested only by
the conformity of its predictions or implications with
observable phenomena and not by comparing its assumptions
with reality. He applied the ideas developed by Karl Popper
for use in the natural sciences in the realm of economics.
Friedman argues that, as in the natural sciences, theories
should be accepted provisionally or rejected only on the
basis of the degree of correspondence of the predictions of
a theory with the factual evidence obtained. Friedman
asserted that a single empirical counterexample to a
theory's predictions will falsify the theory. His idea of
the role of testing thus involves induction via elimination
or rejection. Friedman's approach is similar to the
pragmatism of John Dewey.
For Friedman, the significance of a theory is not considered
to be a direct result of the descriptive realism of the
theory's assumptions. In fact, he extols the virtues of
descriptively false assumptions. According to Friedman,
"Truly important and significant hypotheses have assumptions
that are wildly inaccurate descriptive representations of
reality, and in general the more significant the theory, the
more unrealistic the assumptions." Friedman explains that a
person cannot say that a theory's assumptions are true
because any of its conclusions are true but that a person
could say that there must be at least one assumption that is
false whenever some specific conclusion is false.

Friedman states that for a theory to be useful it must be an
oversimplification of reality and therefore a false picture
of reality. He goes on to say that, depending upon the
theory and its uses, some of these false pictures, along
with their assumptions, may be more appropriate (i.e., more
predictively accurate) than others. For Friedman,
abstraction involves a theory in which many actual
characteristics of reality are designated as absent from the
theory. Given this perspective, every advance in knowledge,
new discovery, or inclusion of additional attributes would
defeat, invalidate, and falsify the previous theory.
Friedman views any theory as deficient and descriptively
false when it fails to specify all of the characteristics of
reality including all extraneous, non-explanatory, and
irrelevant characteristics. It follows that, for Friedman,
all models or theories are imperfect or incomplete because
they do not take into account all aspects of the economy. It
is no wonder that he turned his attention to prediction
rather than to explanation(1).

It is difficult to reconcile Friedman's practice with his
methodological principles. In practice, he frequently argues
on the basis of the plausibility or realism of a model's
assumptions. After comparing predictions with outcomes he
revises hypotheses and assumptions with the intention of
making them more realistic. In the light of test results,
economists (including Friedman) modify their hypotheses and
assumptions in an ongoing and iterative process of
observation and theory. Of course, Friedman should be
concerned with the realism of assumptions. How else would he
know what to attempt next when his predictions fail to
square with the facts? If an economist does not assess the
realism of his assumptions, the process of theory
modification would be inefficient, futile, and based on
speculative guesswork. It is apparent that Friedman is not a
great theoretical system builder and is even inconsistent
with respect to conforming his theory with his practice.

Rand's Objectivism

Ayn Rand's theory
of concept formation transcends both Mises' apriorism and
Friedman's empiricism. Rand explains that the acquisition of
knowledge requires both induction and deduction. What is
known is distinct from, and independent of, the knower.
Knowledge is therefore gained via various processes of
differentiation and integration from perceptual data.
Empirical knowledge is acquired through observational
experience of external reality. For example, people observe
goal-directed actions from the outside and attain an
understanding of causality and other categories of action by
observing the actions of others to reach goals. Individuals
also learn about causality by means of their own acting and
their observation of the outcomes. Introspection is a
reliable but ancillary source of evidence and knowledge with
respect to what it means to be rational, purposeful,
volitional, and acting human being.

For Rand, the essential characteristics of a concept are
epistemological rather than metaphysical. Concepts are
epistemologically objective in that they are produced by a
man's consciousness in accordance with the facts of reality.
Concepts are mental integrations of factual data. Rand
explains that concept formation involves the process of
measurement omission. A concept is a mental integration of
units possessing the same differentiating characteristics
with their particular measurements omitted.

Mises explained that a man's introspective knowledge that he
is conscious and acts is a fact of reality and is
independent of external experience. Mises deduced the
principles of economics and the complete structure of
economic theory entirely through the analysis of the
introspectively-derived a priori idea of human action. While
it is certainly important to understand and acknowledge the
useful role of introspection in one's life, it is also
necessary to realize that its role is limited, secondary,
and adjunct to the empirical observation and logical
analysis of empirical reality. It would have been better if
Mises had said that external observation and introspection
combine to reveal that people act and employ means to
achieve ends. Introspection aids or supplements external
observation and induction in disclosing to a man the
fundamental purposefulness of human action.

Randian epistemology recognizes that Mises' action axiom
could be inductively derived from perceptual data. Human
actions would then be viewed as performed by entities who
act in accord with their natural attributes of rationality
and free will. All the essential principles and laws of
economics could then be deduced from the action axiom.

The Randian or Objectivist view is that the best way for
judging a model or a theory is to examine the plausibility
of its assumptions. As Ayn Rand herself would put it, "Check
your premises." Things which the assumptions abstract from
should pertain importantly to the problem under examination.
An hypothesis, complete with its assumptions, is both
explanatory and predictive if it abstracts the crucial and
common elements from the mass of detailed and complex
conditions surrounding the phenomenon to be explained and
furthers valid predictions of that phenomenon. The
Objectivist view is that economic and other theories need to
omit a lot of details. Randian realism does not require that
all nonexplanatory extraneous particulars be specified.

The Randian conception of abstraction is to attend to some
aspects or attributes of a phenomenon and to exclude others.
From this perspective, certain actual characteristics are
simply absent from specification or measurement. This is far
different from and superior to Friedman's view that some
actual characteristics are specified as nonexistent or
lacking. From a Randian perspective, new knowledge may
expand or refine a theory, concept, or model but it does not
necessarily contradict or invalidate it. In other words and
contrary to Friedman's view, the theory does not have to be
descriptively false(2).

Ayn Rand's methodological approach overcomes the false
alternatives of rationalism and empiricism by explaining how
abstract knowledge of reality can be soundly derived from
valid perceptual experience. Her method for overcoming these
dichotomies includes a number of processes such as
differentiation, induction, integration, deduction,
reduction, measurement omission, and so on.